Legal Due Diligence Checklist
S-Corporation Legal Due Diligence Checklist
Legal review items for S-corporations. The legal architecture is the standard corporate framework — articles, bylaws, stock ledger, board minutes, shareholder agreements — with S-corp-specific items around eligibility, single class of stock, and shareholder eligibility.
Why a S-Corporation-Specific Checklist
- •S-corp eligibility requirements (single class of stock, eligible shareholders only) impose constraints on shareholder agreements and equity plans that do not exist for C-corps.
- •Stock ledgers and board minutes are commonly informal in small S-corps and need cleanup before market.
- •Shareholder agreements often include drag-along, ROFR, and buy-sell provisions that affect deal mechanics.
- •Equity-based compensation in S-corps is constrained — restricted stock and profits interests do not work the same way as in LLCs or C-corps.
The Checklist
Items a buyer or seller in a s-corporation transaction should expect to request, produce, or review.
1. Formation and Corporate Records
Articles of Incorporation and all amendments
State-stamped copies of original articles and every amendment.
Bylaws and amendments
Current bylaws and any amendments, with effective dates.
Certificate of good standing
Current (within 30 days) certificate from state of incorporation and from each foreign-qualified state.
Foreign qualification filings
Each state where the corporation is registered to do business.
Annual reports for last 5 years
From state of incorporation and qualified states.
EIN assignment letter
Form CP-575 or equivalent.
DBA / fictitious name registrations
Any operating names other than the legal name.
2. S-Election and Eligibility
Cross-reference with the S-corp tax DD checklist; legal items focus on the documentation supporting eligibility.
Form 2553 (S-election) and IRS acceptance letter
Original election and IRS confirmation. If lost, request transcript.
Single class of stock analysis
Bylaws, shareholder agreements, employment agreements, and any debt instruments tested for second-class-of-stock issues.
Shareholder eligibility documentation
Each shareholder confirmed as eligible (US individuals, certain trusts, estates; not partnerships, corporations, or nonresident aliens).
QSST and ESBT trust elections
If any shareholder is a trust, copies of QSST or ESBT elections and ongoing compliance.
QSub elections for any subsidiaries
Form 8869 elections and supporting eligibility analysis.
Inadvertent termination history and Section 1362(f) relief
Any events that may have terminated the election and any IRS relief obtained.
3. Capitalization and Stock Records
Stock ledger
Complete history of share issuances, transfers, and cancellations from inception.
Stock certificates (if certificated)
Current and historical certificates, with restrictive legends as required.
Stock subscription agreements
Original subscription documents for each issuance.
Treasury stock and any redemptions
Redemption agreements, board approvals, and source of funds analysis.
Outstanding stock options or warrants
Any equity awards outstanding, with grant agreements and exercise terms. Note: stock options in S-corps must be carefully structured to avoid second-class-of-stock issues.
Restricted stock awards and 83(b) elections
All restricted stock grants with copies of timely 83(b) elections.
Any non-voting common stock
Permitted in S-corps if economic rights are identical, but must be carefully reviewed.
4. Shareholder Agreements
Shareholder agreement and amendments
Current agreement and any prior versions.
Buy-sell provisions
Triggers (death, disability, divorce, termination), valuation methodology, and funding mechanism.
Right of first refusal and right of first offer
Specific provisions and any prior triggers or waivers.
Drag-along and tag-along rights
Thresholds, scope, and effect on deal mechanics.
Voting agreements
Any agreements among shareholders about how to vote shares.
Transfer restrictions for S-corp eligibility
Provisions restricting transfers to ineligible shareholders to protect the S-election.
Spousal consents and community property issues
Where applicable, spousal consent to transfer restrictions.
5. Governance Records
Board of directors composition
Current directors, terms, and any vacancies.
Board meeting minutes for last 3-5 years
Minutes of every meeting and written consents in lieu of meetings.
Shareholder meeting minutes and consents
Annual meetings and any special meetings or written consents.
Officer appointments
Current officers, dates of appointment, and scope of authority.
Major corporate actions documented
Significant decisions (loans, capital expenditures, equity issuances, M&A activity) properly documented in minutes or consents.
Indemnification agreements with officers and directors
Any standalone indemnification agreements.
6. Equity Compensation
S-corps face restrictions on equity compensation that do not apply to LLCs or C-corps. Most equity compensation arrangements in S-corps require careful design.
Stock option plans (incentive and non-qualified)
Plan documents, board approvals, shareholder approvals.
409A valuations supporting option grants
Independent appraisals supporting fair-value strike prices.
Restricted stock and RSU agreements
Vesting schedules, repurchase rights, 83(b) election history.
Phantom stock and stock appreciation rights
Less restrictive on the S-election; review plan terms.
Section 422 ISO compliance
Holding period requirements, $100K vesting limit, qualifying disposition tracking.
Section 83(b) election copies and timely filing
All 83(b) elections by employees with restricted stock.
Termination and forfeiture history
Any forfeitures or repurchases of equity awards.
7. Material Contracts and Change of Control
Top customer contracts (top 10 or top 80% of revenue)
With assignment and change-of-control provisions.
Top supplier and vendor agreements
Critical inputs and sole-source dependencies.
Real estate leases
Landlord consent rights on M&A.
Distribution and reseller agreements
Territory, exclusivity, term, termination.
Bank loans and credit agreements
Acceleration triggers, covenants, prepayment terms.
Government contracts
Federal Anti-Assignment Act, novation requirements.
Software, SaaS, and licensing agreements
Assignment, audit rights, and license scope.
Joint ventures and strategic alliances
Co-venturer consent rights.
Insurance arrangements
Including any captive insurance arrangements.
8. Intellectual Property
Trademark, copyright, patent registrations
Federal and state filings with chain of title.
Founder, employee, and contractor IP assignments
Standard assignment language in offer letters and contractor agreements.
Domain registrations
All domains and registrant information.
Trade secret program
NDAs, confidentiality protocols, marking and access controls.
Open source software inventory
License compliance, GPL exposure, attribution requirements.
Inbound and outbound IP licenses
Technology licensed to or from the corporation.
9. Employment and Labor
Employee roster and classifications
Names, titles, hire dates, compensation, exempt vs. non-exempt.
Employment agreements and offer letters
All written employment documentation.
Independent contractor agreements
All 1099 relationships with classification analysis.
Non-compete, non-solicit, and confidentiality agreements
Restrictive covenants by employee.
Employee handbook
Current handbook and state-specific addenda.
Retirement plans and ERISA compliance
Plan documents, Forms 5500, top-heavy and nondiscrimination testing.
Health and welfare plans
Including special rules for 2-percent shareholders.
Pending or threatened employment claims
EEOC, wage and hour, OSHA, unemployment.
Workers compensation policies and claim history
Last 3-5 years.
10. Real Estate, Permits, and Compliance
Owned real property
Deeds, surveys, title insurance, and any liens.
Personal property leases
Vehicles, equipment, IT.
Operating permits and licenses
Industry-specific licenses and registrations.
Environmental compliance
Phase I or II reports if applicable; remediation history.
Health and safety compliance
OSHA / MIOSHA inspection history.
Data privacy compliance
Privacy policies, breach history, GDPR/CCPA exposure.
11. Litigation, Insurance, Closing Schedule
Pending litigation
All cases by caption, court, status, exposure.
Threatened litigation
Demand letters, pre-suit demands, reserved claims.
Settlement agreements
Last 5 years with continuing obligations.
Government investigations
Open or recently closed inquiries.
Insurance policies
GL, property, E&O, cyber, D&O, EPL, workers comp.
Insurance claim history
Last 5 years.
Master consent schedule for closing
All third-party consents required to close, by counterparty.
Shareholder approvals required for the transaction
Shareholder voting thresholds under bylaws and shareholder agreement.
Frequently Asked Questions
What is the single-class-of-stock issue and why does it matter?
An S-corp can have only one class of stock. Differences in voting rights are okay, but differences in distribution or liquidation rights kill the S-election. Buy-sell agreements, employment agreements with deferred compensation, debt that looks like equity, and disproportionate distributions can all create second-class-of-stock issues. Diligence reviews these carefully, because a second class of stock could mean the entity has been a C-corp the whole time, with retroactive C-corp tax exposure.
Why are 409A valuations important in an S-corp deal?
If the S-corp issued stock options or other equity awards, IRS Section 409A requires that strike prices be no less than fair market value at grant. If the company did not get an independent valuation, the strike prices may be too low, exposing the option holders to penalty taxes and the company to penalties. Diligence requires confirmation that 409A valuations were done at appropriate intervals and that strike prices were set accordingly.
What happens if board minutes are sparse or missing for prior years?
Common in small S-corps. The remediation depends on what is missing. Major corporate actions (capital raises, M&A activity, large loans) ideally have contemporaneous board approvals; if missing, the workaround is often a ratification consent at closing. Routine operations rarely need historical reconstruction. The buyer will usually accept reasonable cleanup so long as no actual disputes exist.
How are stock options in S-corps different from C-corp stock options?
Stock options themselves are generally fine in S-corps. The risk is what happens on exercise: if the option holder is an ineligible shareholder (a partnership, foreign person, etc.), exercise terminates the S-election. Most S-corp option plans include eligibility restrictions for this reason. Restricted stock works similarly. Phantom equity and stock appreciation rights are easier because they do not actually transfer stock.
Should an S-corp acquisition use a 338(h)(10) election or an F-reorganization?
Both can convert a stock deal into an asset deal for tax purposes. 338(h)(10) is faster and more familiar; F-reorg is more flexible and can preserve features like S-status going forward (useful for rollover equity scenarios). The choice depends on the specifics of the deal. This is the kind of structural question that should be modeled before the LOI, not after.
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